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Gases company African Oxygen [JSE:AFX] (Afrox) has seemingly managed to limit the fallout in sentiment from the loss of its large Evraz Highveld contract. The share has held at 2100c, which is closer to its 12-month high of 2340c in August last year than its April 2010 low of 1724c.

The robustness in Afrox’s share price might be ascribed to a cautionary announcement that followed the unexpected resignation of CEO Tjaart Kruger – which has caused some vigorous debate about whether parent company Linde AG may be weighing up its options about Afrox. Would Linde sell Afrox (could Sasol be a leftfield option?) or is it mulling buying out and delisting the business?

Another suggestion doing the rounds is that Afrox could be selling its LPG business – which may well be a precursor to Linde selling or buying out Afrox. The enthusiasm of Linde, which became Afrox’s main shareholder after buying out BOC a few years ago, for its South African business isn’t clear.

However, Afrox has a strong cult following in SA’s investment circles. In fact, older investors will no doubt cite Afrox’s track record as a reliable long-term profit performer as an underpin for the share price. In fact, there are some market watchers who would argue there aren’t too many industrial businesses that could match Afrox’s consistent cash flows and dividends.

But there are now audible whispers that the loss of the Highveld contract, which carried an impairment of more than R150m in its interim results to end-June, may rattle Afrox’s “reliable performer” reputation.

It looks like things turned rather nasty at Highveld. An Afrox presentation also disclosed claims of R400m from two customers caused by supply disruptions brought about by power outages and equipment failure. The company had made no provision for those claims, with legal opinion holding that robust defences exist.

But if Afrox is playing down the Highveld matter, others are arguing that the failure to get the Highveld contract renewed (and Finweek hears Air Liquide has since successfully tendered) is a game-changer. The suggestion is that Afrox, while fiscally secure, may become a far less imposing beast in the gas sector.

Scanning Afrox’s interim results, there are enough reassuring numbers posted about its cash flow statement and balance sheet. Gearing is down to 17,4% from 21,5%, with debt culled to R617m from R941m. Trading margins were fortified (up to 16% from 15%), ensuring operational cash flows still gushed at R434m (equivalent to 126c/share).

But looking forward there are worries. Is Afrox – sans the Highveld contract and early termination of its ArcelorMittal agreement – capable of posting earnings of 150c/share plus… a level that would give some justification for its current share price?

One market watcher likened Afrox’s position to a game of monopoly. “It’s like being the player with a lot of cash but very few properties. You can probably get around the board for a while, but eventually the players holding the valuable properties (rival gas businesses Air Liquide and Air Products) are going to take all your money.” He adds: “How the gas industry works is that a company needs to win the strategic supply schemes and then should proceed to paint everything in its colours within a 100-mile radius.”

The intimation is that with competitors (read Air Liquide and Air Products) muscling in on Afrox’s old turf, it risks being shut out of a rather vast area. With that in mind, some readers might recall Afrox lost the valuable platinum axis to Air Products (which has Remgro as an anchor shareholder) some years ago.

Afrox should survive the Highveld blow, although it’s no use pretending immediate growth for Afrox will be limited – and probably squeezed from internal efficiencies rather than new business.

Longer-term growth opportunities may well have to be sought outside SA’s borders (although Linde is already in a number of African markets), while there could also be a boost to bottom line in 2013 after the new Pretoria air separation unit is commissioned next year.

Notwithstanding, Finweek can’t but conclude reclaiming earnings levels of 150c/share is starting to look a very tough ask. How Afrox – seemingly short of growth engines – must wish it still owned Life Healthcare…

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